Oil prices slip after hitting record $135

Crude shifts gears after setting a record, as Brazil reports finding a new oil field. Gasoline sets 15th straight record high.

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By David Goldman, CNNMoney.com staff writer

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NEW YORK (CNNMoney.com) -- Crude oil prices sank Thursday after posting another record high earlier in the morning.

Light, sweet crude traded down $2.36 to settle at $130.81 on the New York Mercantile Exchange.

Oil edged lower after Brazil's state-run oil company Petrobras said it struck more oil near a deep, offshore field. The company didn't say how much oil had been found, but it said the nearby Tupi field could have recoverable reserves of up to 8 billion barrels of oil.

Earlier Thursday, oil prices hit a record $135.09 a barrel, a day after soaring above $130 for the first time.

The biggest driver of oil prices in the early morning was a Wall Street Journal report that said the Paris-based International Energy Agency is worried that oil companies are not investing enough into their aging oil fields. The IEA said companies may not be able to meet 100 million barrels a day in production over the next 2 decades. If they cannot meet those levels, they may not be able to keep up with global demand.

"It seems like on a daily basis we have a new protagonist," said MF Global energy analyst John Kilduff. "This is a very ill-timed interview with The Wall Street Journal, because it just gives traders the comfort and rationale to buy more."

As a result of future supply concerns, long-term oil contracts - which had been trading $8 to $10 cheaper than the current front-month contract as early as 2 weeks ago - are now trading much higher. Oil for December 2016 delivery was trading at $140.30 on Thursday.

When a long-term contract is trading lower than the front-month contract, traders usually believe supplies will grow in the future and are inadequate now. That phenomenon is known as "backwardation" and often leads to higher prices in the current month.

When contracts that are far in the future are trading higher than the current contract, that usually means that supplies are adequate now and may fall off in the future. Called "contango," traders often sell off front-month oil when those conditions occur - leading to a burst in crude's bubble.

But don't expect prices to fall off the cliff this time, because traders believe supplies are too low now and will be even less sufficient in the future. That may just lead to high prices this month with even higher prices down the road.

Supply and demand or speculation?

Many Americans find it hard to believe that global demand for oil is rising, since demand is slumping at home amid a struggling U.S. economy that also has concerns about inflation. But some global economies - namely China - are much stronger now. Since oil is a dollar-traded commodity, a weakened dollar has made crude look relatively cheap to some foreign nations.

"Discount the speculation idea completely - fundamentals are really driving things," said Barclays Capital commodities analyst Kevin Norrish. "Oil demand is still strong, but non-OPEC supplies have fallen very sharply, especially in Russia."

The report from the IEA is the latest in a string of bleak supply news. On Wednesday, the U.S. Energy Information Administration said U.S. crude supplies declined unexpectedly. According to Kilduff, Mexican production is down 6% year-over-year, the Nigerian region's oil production can be lost completely when rebels attack, and ExxonMobil Corp. (XOM, Fortune 500) reported an 11% decline in production in its latest earnings report.

"If ExxonMobil isn't able to up production to capitalize on oil in the triple digits, then there must be problems with oil supplies," said Kilduff.

Some analysts, however, believe that many commodities investors have boosted the price of crude with speculative trading, treating oil as a hedge against inflation due to the weakened dollar.

"You can't swing a cat without hitting a barrel of crude oil here: We have an over-supply in the United States," said Stephen Schork, editor of the energy industry newsletter The Schork Report. Schork estimates crude should be trading between $85 to $90 a barrel, given how oil has traded over the past 6 years. Accordingly, he thinks about $45 to $50 of crude's price can be chalked up to speculation.

"Saying this market is all supply and demand is absolutely ludicrous," he added.

Congress also isn't buying that supply and demand are the only factors. Wednesday, the Senate Judiciary Committee grilled executives from ExxonMobil, ConocoPhillips Co. (COP, Fortune 500), Shell Oil Co. (RDSA), Chevron Corp. (CVX, Fortune 500) and BP (BP) as to how their companies can in good conscience make so much money, while Americans pay so much to heat their homes and fill up their cars. The hearing continued in the House of Representatives on Thursday.

Gas hits another record

Retail gas prices hit record highs for the 15th day in a row, motorist group AAA's Web site showed Thursday.

The nationwide average for a gallon of regular unleaded rose to $3.831, up from $3.807 the previous day.

Gas prices have now risen for 16 straight days.

The AAA national average shows gas prices up about 9% from a month ago, and up nearly 19% from year-ago levels.

The price of gas at the pump has been supported by record-high crude oil prices, which have more than doubled over the past year.

Gas is most expensive in Alaska, where a gallon of regular unleaded costs an average of $4.133. The second-most expensive state for gas is Connecticut, where a gallon of gas costs $4.083, according to AAA.

Gas is cheapest in Arizona, where a gallon costs $3.649 a gallon. The second-least expensive state for gas is Wyoming, where a gallon of gas costs $3.658.

The pinch on consumers at the pump comes just ahead of the summer driving season, which kicks off with Memorial Day weekend.

CNNMoney.com staff writer Catherine Clifford contributed to this report. To top of page

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